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CIVIL APPEAL NO. 2481 OF 2014 Darius Rutton Kavasmaneck …Appellant Versus Gharda Chemicals Limited & Others …Respondents

REPORTABLE

IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 2481 OF 2014
Darius Rutton Kavasmaneck …Appellant

Versus

Gharda Chemicals Limited & Others …Respondents

J U D G M E N T

Chelameswar, J.
1. The first respondent is a company under the Companies Act, 1956
(hereinafter referred to as “the Act”). Two appellants herein who are
mother (since deceased) and son respectively are minority shareholders
holding or otherwise controlling 17 per cent of the equity in the first
respondent company.

HISTORY OF THE COMPANY

2. First respondent company is carrying on the business of “selling
chemical process, knowhow and of manufacturing dyes, chemicals and textile
auxiliaries” etc. It all started as a family firm in the year 1962 known
as M/s. Gardha Chemicals Industries. The above-mentioned partnership was
created by (1) the mother of the first appellant, (2) the husband of the
first appellant, (3) a sister of the first appellant and the second
respondent – the brother of the first appellant. The partnership deed
contained a clause that none of the partners could sell his/her respective
share in the firm without offering it first to the other partners.

3. On 6th March, 1967, a private limited company was incorporated with
the principal object of taking over the assets and liabilities of the above-
mentioned partnership as a going concern. Article 57 of the Articles of
Association contained restrictions on the rights of all the shareholders to
transfer their shares. Any shareholder desiring to sell his shares must
offer his shares to the other shareholders of the company pro rata to the
holding of each of such other members respectively at a fair value.[1]

4. With effect from 17th August, 1988, the first respondent company
became a public company (under Section 43A (1A) of the Act) as its turnover
exceeded the limit prescribed thereunder:
“43A. ****** ****** ******
****** ****** ******

(1A) Without prejudice to the provisions of sub-section (1), where the
average annual turnover of a private company, whether in existence at the
commencement of the Companies (Amendment) Act, 1974, or incorporated
thereafter, is not, during the relevant period, less than rupees one crore,
the private company shall, irrespective of its paid-up share capital,
become, on and from the expiry of a period of three months from the last
day of the relevant period during which the private company had the said
average annual turnover, a public company by virtue of this sub-section;

Provided that even after the private company has so become a public
company, its articles of association may include provisions relating to the
matters specified in clause (iii) of sub-section (1) of Section 3 and the
number of its members may be, or may at any time be reduced, below seven.”
5. One important development in the history of the first respondent
company relevant for the decision of the instant appeal is that on 2nd
April, 2001 a notice was issued calling for extraordinary general meeting
of the first respondent company scheduled to be held on 5th May, 2001.
The purpose of the said meeting was to adopt a resolution for amending the
Articles of Association of the first respondent by inserting clause (d) to
Article 3 thereof. The substance of the said clause is to prohibit any
invitation or acceptance of deposits from persons other than the members,
directors or the relatives of the members or the directors of the company.
According to the respondents, such a proposal for amendment was
necessitated to comply with the requirements of the newly inserted sub-
section (d) of Section 3(1)(iii)[2] which came to be inserted by Act 53 of
2000 w.e.f. 13.12.2000. The appellant opposed the amendment of the
Articles of Association and the amendment could not be carried as the
proposal failed to muster the requisite majority.

HISTORY OF THE LITIGATION:

6. In the month of May, 2009, certain reports appeared in the media that
the second respondent was proposing to sell his shares in the first
respondent company which were at that time valued at approximately 1600
crores. The appellant, therefore, filed a Company Petition No. 132/397-
98/CLB/MB/2009 (hereinafter referred to as the Company Petition 132 of
2009) before the Company Law Board, inter alia, seeking prohibitory
orders[3] against the 2nd and 3rd respondents from committing breach of the
pre-emption agreement contained in Article 57 of the Articles of
Association referred to supra. On 11th December, 2009, ad-interim
injunction order was passed by the Company Law Board restraining the second
respondent from alienating his share without permission of the Company Law
Board. However, the Company Petition No. 132 of 2009 was heard finally
and dismissed by an order dated 14th May, 2010.

7. Aggrieved by the same, the appellants preferred Company Appeal
No.24/2010 before the High Court of Bombay on 26th June, 2010. The High
Court summarized the decision of the Company Law Board as under:
“75. It is on this material that the company petition was placed before
CLB and heard accordingly. The CLB firstly held that the first respondent
is a public company. Once it is held to be a public company, then, its
shares are freely transferable and the issue was to whether any preemption
clause/article restraining transferability of shares in public company is
valid. The Board held that the Article 57 does contain such restriction
but, the Board relying upon a judgment of this Court in the case of Western
Maharashtra Development Corporation Ltd. Vs. Bajaj reported in (2010) 154
Company Cases 593 (Bom) held that such an clause in the Articles of
Association will not be applicable to 1st respondent company. Once it is
held to be a public company, its shares are freely transferable and the
Articles would not hold good as they are contrary to the statute. Holding
that violation of such an clause in the Articles is not an act of
oppression, the petition came to be dismissed.”

The said appeal was finally heard and dismissed by the impugned judgment
dated 14th June, 2011.
According to the appellants, the High Court held that –
“an agreement between shareholders of an unlisted public company conferring
a right of preemption which is embodied in its Articles is invalid and
unenforceable.” – SLP

8. Elaborate submissions were made on either side dealing with the
various provisions of the Companies Act as amended from time to time. The
learned counsel appearing on either side also submitted written briefs.

9. According to the written brief submitted by the appellant the
question that arises for consideration of this Court is summarized as
follows: –
Whether on and after the bringing into force of the Companies (Amendment)
Act, 2000, the status and character of Gharda Chemicals Ltd. (R-1)
continued to be as that of a “hybrid company” (Section 43A company) and
whether this company and its members are bound by the terms of a preemption
clause contained in Article 57 of the Articles of Association?

In our opinion, the REAL QUESTION is not whether after the Amendment Act 53
of 2000, the first respondent continued to be a private company or became a
public company, But whether the amendment made by the Act 53 of 2000 to
Sections 3 and 43A destroys the rights and obligations created by Article
57 of the Articles of Association of the first respondent company.

10. The case of the appellants all through has been that notwithstanding
the amendment of the Act by the Amendment Act 53 of 2000, Article 57 of the
Articles of Association still governs the rights of the members of the
first respondent Company.

11. On the other hand, the case of the respondents has always been and is
that the first respondent company is a public company having had become so
by the operation of law i.e., Section 43A(1) and it cannot now become a
private company. There is nothing in the Amendment Act 53 of 2000 which
automatically renders a public company created under Section 43A to become
a private company. It is also the case of the respondents that the failure
to amend the Articles of Association to give effect to Section 3(1)(iii)(d)
ipso facto make the first respondent a public company thereby rendering
Article 57 inoperable.

12. We shall deal with those arguments later in the judgment. Before
dealing with these various arguments, we deem it appropriate to examine the
relevant provisions of the Companies Act, and the various amendments made
to the Act from time to time.

SCHEME OF THE RELEVANT PROVISIONS OF THE COMPANIES ACT:

13. The Companies Act, 1956, (hereinafter referred to as ‘the Act’) as it
was originally enacted, contained only the definition of a ‘private
company’ under Section 3(1)(iii)[4] to mean a company[5] [a defined
expression under Section 3(1)(i)] which, by its articles (a) restricts the
right to transfer its shares, if any[6], (b) limits the number of its
members to fifty and (c) prohibits any invitation to public to subscribe
for any shares or debentures for the company.

14. Section 27(3) of the Act stipulates:

“In the case of a private company having a share capital, the articles
shall contain provisions relating to the matters specified in sub-clauses
(a), (b) and (c) of clause (iii) of sub-section (1) of section 3; and in
the case of any other private company, the articles shall contain
provisions relating to the matters specified in the said sub-clauses (b)
and (c).”

This sub-section makes it clear that to be a private company either with or
without share capital the Articles of Association of such company must
necessarily provide for the matters specified in Section 3(1)(iii) of the
Act. In the case of a private company limited by share capital all the
three requirements specified in clauses (a), (b) and (c) of clause (iii) of
sub-section (1) are to be provided. In the case of a private company other
than a company having share capital only matters specified in clauses (b)
and (c) of the above sub-section are to be stipulated.

15. Part-II of the Act deals with incorporation of company and matters
incidental thereto. A brief survey of the said Part insofar as it is
relevant for the purpose of this case is necessary.

16. Section 12 deals with the mode of forming incorporated companies,
either public or private. It stipulates that an incorporated company may
be formed by two or more persons in the case of a private company and seven
or more persons in the case of a public company by subscribing their names
to a memorandum of association and complying with other requirements of the
Act in respect of registration.

17. Section 26 of the Act mandates inter alia that in the case of a
private company limited by shares, there shall be registered (along with
the memorandum),
Articles of Association signed by the subscribers of the memorandum. Such
Articles of Association must prescribe the regulations for the company.
“Section 26. Articles prescribing regulations.—There may in the case of a
public company limited by shares, and there shall in the case of an
unlimited company or a company limited by guarantee or a private company
limited by shares, be registered with the memorandum, articles of
association signed by the subscribers of the memorandum, prescribing
regulations for the company.”
18. The Act came to be amended by Act 65 of 1960. By the said
amendment, Section 43A came to be inserted in the said Act. It originally
contained eight sub-sections. Sub-Section (1) declared that any private
company which has a share capital, of which twenty-five per cent of the
paid-up share capital is held by “one or more bodies corporate”[7] become a
public company.

19. The relevant part of sub-Section (1) reads as under:

“43A. Private company to become public company in certain cases – (1) Save
as otherwise provided in this section, where not less than twenty-five per
cent of the paid-up share capital of a private company having a share
capital is held by one or more bodies corporate, the private company shall,-
***** ***** *****
***** ***** *****
become by virtue of this section a public company.”

20. Such companies popularly came to be called DEEMED PUBLIC COMPANIES
(they are referred to by the learned counsel for the appellant as “HYBRID
Companies”) though Section 43A does not use that expression. In our
opinion, Section 43A only creates a new class of PUBLIC companies
-answering the description contained therein though they have and can
retain all the attributes of a PRIVATE COMPANY as defined under Section
3(i)(iii). These companies are hereinafter referred to as “HYBRID
Companies” for the sake of convenience.

21. Obviously, the question of private companies without share capital
becoming public companies does not arise. Bodies corporate cannot hold non-
existent shares in such private companies. Sub-Section (1) has two
provisos. An examination of the contents of the first proviso is relevant
and necessary for the purpose of this case. We shall deal with the same
separately.

22. Sub-section (2) mandates that within three months from the date on
which a private company becomes a public company by virtue of Section
43A(1), the company shall inform the Registrar that it has become a public
company. It also mandates that the Registrar shall make necessary
consequential alterations of the records.

23. The language and implication of sub-section (2) will be examined
later in the judgment.

24. We are not concerned with sub-Section (3). Sub-Section (4)
contemplates the possibility of a private company which becomes public
company by virtue of the operation of Section 43A once again becoming a
private company. It stipulates that any private company which becomes a
public company by virtue of Section 43A(1) shall continue to be a public
company, until such time it becomes a public company in accordance with the
provisions of the Act. Such a re-conversion requires the approval of the
Central Government.
“(4) A private company which has become a public company by virtue of this
section shall continue to be a public company until it has, with the
approval of the Central Government and in accordance with the provisions of
this Act, again become a private company.”

25. Sub-section (5) provides for penalties for defaults in complying with
the mandate of sub-Section (2). Sub-Sections (6) and (7) were omitted by
the Amending Act 31 of 1988. Sub-Section (8) prescribes certain
obligations attached to such public companies, the details of which may not
be necessary.

26. By the Amendment Act 41 of 1974, sub-Sections (1A) and (1B) came to
be inserted in Section 43A. By the newly inserted sub-sections, the
legislature declared that two more classes of private companies become
public companies on the happening of the events specified in each of the
newly introduced sub-sections.

27. Sub-section (1A) declares that a private company whose “average
annual turnover” “during the relevant period” is not less than Rs.1 crore
becomes public company.
“(1A) Without prejudice to the provisions of sub-section (1), where the
average annual turnover of a private company, whether in existence at the
commencement of the Companies (Amendment) Act, 1974, or incorporated
thereafter, is not, during the relevant period, less than such amount as
may be provided, the private company shall, irrespective of its paid-up
share capital, become, on and from the expiry of a period of three months
from the last day of the relevant period during which the private company
had the said average annual turnover, a public company by virtue of this
sub-section :

Provided that even after the private company has so become a public
company, its articles of association may include provisions relating to the
matters specified in clause (iii) of sub-section (1) of section 3 and the
number of its members may be, or may at any time be reduced, below seven.”
28. The amount of Rs.1 crore mentioned originally in the sub-section (1)
is substituted by the Act 31 of 1988 with the words “such amount as may be
provided”.

29. Sub-section (1B) declares that any private company holding not less
than 25 per cent of the paid up share capital of a public company shall
become a public company. Both the sub-sections contain a proviso each,
which are ipsissima verba. The implications of such provisos along with
the implication of the proviso to sub-Section (1) shall be examined later.

“(1B) Where not less than twenty-five per cent of the paid-up share capital
of a public company, having share capital, is held by a private company,
the private company shall,-

on and from the date on which the aforesaid percentage is first held by it
after the commencement of the Companies (Amendment) Act, 1974, or

where the aforesaid percentage has been first so held before the
commencement of the Companies (Amendment) Act, 1974 on and from the expiry
of the period of three months from the date of such commencement, unless
within that period the aforesaid percentage is reduced below twenty-five
per cent of the paid-up share capital of the public company,

become, by virtue of this sub-section, a public company, and thereupon all
other provisions of this section shall apply thereto :

Provided that even after the private company has so become a public
company, its articles of association may include provisions relating to the
matters specified in clause (iii) of sub-section (1) of section 3 and the
number of its members may be, or may at any time be reduced, below seven.”
30. Sub-sections (9) to (11) of Section 43A came to be inserted by
various amending acts. The complete details of the contents of all these
sections and their legislative history is not necessary for us except to
note that in the explanation appended to sub-section (9), the expressions
“relevant period” and “turnover” occurring in sub-Section (1) and (1A) are
defined as follows:-
Explanation – For the purposes of this section, –

“relevant period” means the period of three consecutive financial years, –
Immediately preceding the commencement of the Companies (Amendment) Act,
1974 ,or
A part of which immediately preceded such commencement and the other part
of which immediately, followed such commencement, or
Immediately following such commencement or at any time thereafter;

(b) “turnover”, of a company, means the aggregate value of the
realization made from the sale, supply or distribution of goods or on
account of services rendered, or both, by the company during a financial
year;
31. Act 31 of 1988 inserted sub-section (1C) which declares that any
private company accepting deposits from “the public other than its members,
directors or their relatives” (hereinafter referred to as “PUBLIC” for the
sake of convenience) pursuant to such invitation made by an advertisement
after the commencement of the Amendment Act i.e. 15.6.1988 or renews an
existing deposit becomes a public company. Even sub-section (1C) has a
proviso in terms which are identical with the provisos to Section (1A) and
(1B).
“(1C) Where, after the commencement of the Companies (Amendment) Act, 1988
a private company accepts, after an invitation is made by an advertisement,
or renews, deposits from the public, other than its members, directors or
their relatives, such private company shall, on and from the date on which
such acceptance or renewal as the case may be, is first made after such
commencement, become a public company and thereupon all the provisions of
this section shall apply thereto:

Provided that even after the private company has so become a public
company, its articles of association may include provisions relating to the
matters specified in clause (iii) of sub-section (1) of section 3 and the
number of its members may be, or may at any time be, reduced below seven.”
32. Thus, it can be seen that by the date of amendment of Section 43A by
the Act 53 of 2000 under Section 43A, there are four classes of private
companies which are declared by the said section to become public companies
on the happening of an event mentioned in each of the sub-sections.

33. It is also necessary to note that each of the above-mentioned four
sub-sections contained a proviso. The tenor of all the four provisos is
identical.
“Provided that even after the private company has so become a public
company, its articles of association may include provisions relating to the
matters specified in clause (iii) of sub-section (1) of section 3 and the
number of its members may be, or may at any time be reduced, below seven.”

34. Each one of these provisos declare that even after a private company
becomes a public company by virtue of the operation of any one of the four
sub-Sections i.e. (1), (1A), (1B) and (1C) of Section 43A; the Articles of
Association of such company may include provisions relating to the matters
specified in Section 3(1)(iii). The provisos further declare that the
number of members of such company “may be or may at any time be reduced,
below seven”. The implications of the provisos require an examination.

35. The provisos permit the continuance of stipulations in the Articles
of Association of such public companies which relate to the matters
specified in Section 3(1)(iii). In other words, though the companies
whose Articles of Association provide for matters specified in Section
3(1)(iii) are private companies, and under the scheme of the Companies Act
a public company cannot have such stipulations, Section 43A expressly
permit the four classes of public companies to retain such Articles of
Association.

36. Secondly, the relaxation under the proviso regarding the membership
of such companies getting reduced below seven is meant to obviate the
conflict with the requirement of Section 12 which requires a minimum of
such seven persons to constitute a public company.

37. The employment of the expression “may” in the clause, “its Articles
of Association may include provisions relating to the matters” only
indicates that a private company which becomes a public company by virtue
of the operation of any one of the four sub-sections of Section 43A has
choice either to retain those stipulations in its Articles of Association
relating to the matters specified under Section 3(1)(iii) or to amend its
Articles of Association either deleting all or some of the stipulations
relating to matters specified in Section 3(1)(iii) from its Articles of
Association. The reason is that a private company has certain privileges
and exemptions under the Companies Act in the sense that a private company
is subject to a lesser degree of regulation under the provisions of the
Companies Act, than a public company. The moment private company becomes
a public company, either by operation of law or the volition of its member,
such company becomes subject to a more rigorous regulation of its
activities by the various provisions of the Companies Act. At the same
time, a public company has certain advantages under law. Therefore, it is
for the company and its members to decide whether the restrictions and
limitations contained in the Articles of Association referable to matters
specified in Section 3(1)(iii) should still continue even after the company
lost the exemptions and privileges attached to a private company.

38. Section 43 of the Companies Act recognizes the existence of such
privileges and exemptions by declaring that a private company which
defaults in complying with any one of the stipulations made in its Articles
of Association relating to the matters specified under Section 3(1)(iii),
such Company “shall cease to be entitled to the privileges and exemptions
conferred on private companies by or under this Act and this Act shall
apply to the Company as if it were not a private company.[8]

39. Therefore, these four provisos give an option to the company either
to retain the original Articles of Association or alter them, but there is
no statutory compulsion to alter the Articles of Association. Our view is
fortified by the language of sub-Section (2) of Section 43A.
“(2) Within three months from the date on which a private company becomes a
public company by virtue of this section, the company shall inform the
Registrar that it has become a public company as aforesaid, and thereupon
the Registrar shall delete the word “Private” become the word “Limited” in
the name of the company upon the register and shall also make the necessary
alterations in the certificate of incorporation issued to the company and
in its memorandum of association.”
40. It only obligates a private company which becomes a public company by
virtue of the operation of Section 43A to inform the Registrar within three
months from the date on which the private company becomes a public company,
regarding the change in its status from ‘private’ to ‘public’.

41. On receipt of such intimation, the Registrar is required to make a
change in the name of the company in his register and is also required to
make necessary alterations in the ‘certificate of incorporation’ issued to
the company and its ‘Memorandum of Association’.

42. Sub-section (2) does not obligate either the company or the Registrar
to make any changes in the Articles of Association. No other provision of
the Companies Act is brought to my notice which creates such an obligation.

43. Sub-section (11) was inserted by Act 53 of 2000 which is the bone of
contention in the instant appeal and reads as follows:-

“(11) Nothing contained in this section, except sub-section (2A), shall
apply on and after the commencement of the Companies (Amendment) Act,
2000.”
The implication of the same requires a detailed examination at a later
stage of this judgment.
DECISION OF THE HIGH COURT:

44. The High Court noted the history of Sections 3(1)(iii) and 43A of the
Act and recorded a finding that in view of the insertion of sub-section
(2A) in Section 43A by the Companies Amendment Act (Act 53 of 2000)–
“……… the concept of deemed public company under section 43A and introduced
by the Companies (Amendment) Act has now been abolished based on the
recommendation of the working group of Companies Act, 1956.”
45. The High Court also recorded a finding that the first respondent
company is a public company[9]. The High Court then went on to examine
whether there can be any restriction on the shareholder’s right to transfer
shares in a public company. The High Court reached a conclusion that in
view of the subsequent statutory amendments made in 1988 and 2000 to the
Companies Act, Article 57 of the Articles of Association of the first
respondent company would no longer govern the rights of its shareholders to
transfer their shares.
“After 17th August 1988 and in any event after dated 13th December 2000,
the position has undergone a change and Article 57 appearing in the
Articles of Association would no longer be the governing article. It is
not necessary to then consider the argument as to whether the said article
is void or not. That article must give way to the statutory provision. If
the shares of public company are freely transferable, then, the statutory
provisions in that behalf will take such effect notwithstanding anything to
the contrary contained in the Articles of Association of such company. The
over-riding effect given to the Act by section 9 cannot be ignored and
brushed aside as desired by the appellants.”

46. An alternative argument of the appellants that in view of the fact
the shares of the first respondent company are not listed shares, there can
be a right of preemption, is rejected by the High Court.
“Their alternate argument that assuming that GCL is public company, its
shares being nonlisted, there can be a right of preemption, is equally
unsound and not tenable. There is no distinction made in the Act of this
nature. That argument is canvassed only by relying on the definition of
the term ‘listed public companies’ appearing in section 2(23A). The
definition itself clarifies that a public company which has any of its
securities listed in any of the recognized stock exchange will be termed as
listed public company. Nonetheless it remains a public company and merely
because its shares are not listed in any recognized stock exchange does not
mean that there is any restriction on their transfer. They are and
continue to be freely transferable as they are shares of a public company.
The broad distinction as noticed above, between the term ‘Private’ and
“Public” company, is enough to turn down this alternate argument.”

47. The High Court also rejected the other submission of oppression and
mismanagement pleaded by the appellants as the basis of the plea of
oppression and mismanagement is the existence of legally valid preemption
clause. The High Court held–
“127. Once all these arguments and contentions are dealt with, then,
other part of submissions of Mr. Samdani on oppression of minority also
fail. They are raised on the basis that the preemptive right is defeated
by respondent Nos.2 to 5 by their several acts of omission and commission.
Once the preemptive right itself is not in existence by virtue of the
statutory provisions in the field, then, there is no act of oppression. As
held above, the plea of mis-management has been given up and has not been
pursued.”

48. The reasons which led to the above extracted conclusions of the High
Court are as follows:

A) Section 43A prior to its amendment by Amendment Act 53 of 2000
only provided for various situations in which a private company becomes a
public company by operation of law but not vice-versa.
“112. … In other words, this section permitted a private company to
become a public company in certain cases and once the word private is
deleted it becomes a public company. However, there was nothing which
permitted such public company to again become private company and that is
achieved by insertion of section 43(2A).
B) The High Court also opined that in view of the declaration
contained under sub-section (11) of section 43A, which was inserted by the
Amendment Act 53 of 2000, the entire Section 43A becomes inoperative w.e.f.
13.12.2000 (the day on which the Amendment Act came into force) except for
sub-section (2A). Thereby “the concept of deemed public company under
Section 43A” has “been abolished”.

“112. …….. Sub-section 43A(11) which also was inserted by Act 53 of 2000
from 13th December 2000, clarified that nothing contained in section 43A,
save and except sub-section 2A shall apply on and after the commencement of
Companies (Amendment) Act 2000. In other words, whole of section 43A
except for one sub-section viz., sub-section 2A ceases to apply after the
commencement of Companies (Amendment) Act, 2000. ………………. Thus, section
43A itself became inapplicable by virtue of sub-section 11. The effect of
all this is that the concept of deemed public company under section 43A and
introduced by the Companies (Amendment) Act has now been abolished based on
the recommendation of the working group the Companies Act, 1956.”
C) The High Court held that though the first respondent company
was initially incorporated as a private company, it became a public company
(in the language of the High Court ‘a DEEMED public company’) by virtue of
the operation of Section 43A (1A) but ceased to be a private company.
Since its Articles of Association could not be amended to give effect to
the newly inserted clause (d) of Section 3(1)(iii) (introduced by Act 53 of
2000 w.e.f. 13.12.2000), therefore, its status as ‘DEEMED public company’
itself lapsed w.e.f. 13.12.2000 and thereafter the first respondent company
would only be a public company but not either a private company or a DEEMED
public company whose Articles of Association could contain restrictions on
the transfer of shares of its members.

“115. It is clear from the factual position that the attempt to amend the
Memorandum and Articles of Association of the first respondent was
unsuccessful. The said resolution proposed in the meeting held on 5th May
2001 was not carried but in fact defeated. Once it was defeated, then, the
first respondent which had become a public company on 17th August 1988
continued with that status. It would be of relevance to note that the
resolution was moved in the meeting held on 5th May 2001. That resolution
was defeated on that day. However, the Companies Amendment Act 2000 had
come into effect already and to be precise from 13th December 2000. On
13th December 2000, GCL was not a deemed public company but a public
company. Once it was a public company, then, the argument of the appellants
that it continued to retain its fundamental and basic character as a
private company cannot be accepted. The status is conferred by law. The
status was sought to be changed or amended by moving an amendment to insert
an additional clause (d) was defeated, then, there is no scope to alter the
status of the respondent No.1 company by either terming it as a deemed
public company or a public company retaining the fundamental and basic
character of a private company. Both these concepts are unknown to law.”

49. SUBMISSIONS BY THE APPELLANTS:
(i) On a plain reading of sub-Section (11), it is clear that Section 43A
is retained on the statute book and not deleted by the Companies
(Amendment) Act, 2000. Had the Parliament intended to completely efface
all Section 43A companies, the surest manner would have been to delete
Section 43A from the statute. The retention of Section 43A is an extremely
strong indicator of the legislative intention to continue recognition of
existing “hybrid companies” even after 13.12.2001.

(ii) This legislative intention is made clear by the insertion of clause
(11) in Section 43A by the Companies (Amendment) Act, 2000 which reads:
“(11). Nothing contained in this section, except sub-section (2A), shall
apply on and after the commencement of the Companies (Amendment) Act,
2000.”
The expression “nothing contained in this section .. shall apply on and
after”, coupled with the retention of Section 43A on the statute book,
clearly indicates that the legislature did not want the regime of hybrid
companies to lapse w.e.f. 13.12.2000.

(iii) Apart from retaining Section 43A on the statute book, Section 111(14)
of the companies Act, 1956 also remained in the statute after the Companies
(Amendment) Act, 2000. Section 111(14) reads:
“In this section “company” means a private company and includes a private
company which had become a public company by virtue of Section 43A of this
Act.”

The justification for retaining a specific reference to Section 43A in
Section 111 is that the status of deemed public companies continued to be
recognized even after the 2000 amendment. Had the Parliament’s intention
been otherwise, Section 43A itself and all references in the Companies Act,
1956 to Section 43A would have been deleted by the legislature.

(iv) The insertion of sub-section (2A) into Section 43A was required to
provide an exit route on and after 13.12.2000 for an existing hybrid
company which ceased to attract the operation of Section 43A(1) – (1C).
Prior to the 2000 amendment, where a hybrid company ceased to attract the
operation of the relevant sub-section of Section 43A which had rendered it
a hybrid company with approval of the Central Government was mandatory in
terms of sub-section 43A(4). The 2000 amendment removed the requirement
for Central Government approval.

(v) Each of the sub-sections of Section 43A contained a specific
clarificatory proviso which preserved the essential character and status of
a private company. Therefore, to construe Section 43A subsequent to
13.12.2000 to destroy the essential character and status of the companies
covered by Section 43A would be illogical.

(vi) A “Company” is a legal vehicle for more than one person/collection of
persons to come together and form an enterprise. The basic terms on which
such persons would join together would be contained in the Memorandum &
Articles of Association of such a company, creating rights and obligations
including the conditions subject to which shares are to be held. When a
person becomes a member of a company he agrees to be bound by the covenants
in the Articles of Association (Section 36[10]). The Articles are the
foundation on the basis of which shareholders of the company deal with each
other. In the case of a company such as the Respondent No.1, the
application of Section 43A did not in any manner disturb the existing
arrangements among the shareholders but added on certain regulatory
requirements. Assuming (whilst denying) that Section 43A stood effectively
“repealed” on and after 13.12.2000, there is nothing to suggest that the
intention of the legislature was to completely disrupt the foundational
arrangement amongst shareholders across the country in tens of thousands of
private limited companies. In other words, assuming there was a repeal,
the status of every deemed public company reverts back to a private company
and not a public company. Should the status of every hybrid company
subsequent to the 2000 amendment be regarded as “public” that would mean a
destruction of various Articles which thought permissible in a private
company are illegal with regard to a public company.

(vii) It is settled position that unless the contrary intention appears, an
enactment is presumed not to be intended to have a retrospective operation.
The amendment to the definition of a “private company” affects its status
and would affect substantive vested rights acquired over decades. An
amendment which affects alteration in status/substantive vested rights is
always presumed to be prospective in operation.

(viii) By the Amendment Act of 2000, two prospective changes were
introduced in the definition of a “private company” – first regarding such
a company having a minimum paid up capital of one Lakh and second that such
a company in its Articles must also include a fourth prohibition (d)
regarding invitation or acceptance of deposits from persons other than its
members, directors or their relatives. Consequently, whilst no fresh
private company could be incorporated after the Amendment Act of 2000,
unless it met with the new amended definition, for existing private
companies, the 2000 Amendment made a provision by introducing sub-sections
(3) and (5)[11] thereby pre-existing private companies were required to
increase their paid up capital within a period of two years to meet with
the minimum threshold of Rupees One Lakh now introduced by the Amendment
Act of 2000, no provision was contained for pre-existing private companies
to amend their Articles of Association to introduce the new sub-clause (d)
in its Articles. Thus, the existing private companies were not required to
amend their articles by introducing the fourth clause (d) in its Articles
to retain their character of a private company.

50. SUBMISSIONS BY THE RESPONDENTS:

(i) With the introduction of the Amendment Act of 2000 on 13th December
2000, an existing private company that does not have clause (d) in its
articles becomes a public company. Any other construction of the amendment
would result in the creation of two classes of private companies leading to
discriminatory results.

(ii) Neither the definition in Section 3(1) nor the other sub-sections of
Section 3 carve out an exception from the operation of clause (d) to
companies existing on 13.12.2000; and do not prescribe a time limit for
insertion of the provisions to give effect to clause (d) in the Articles of
Association. Therefore, such non-inclusion necessarily led to the result
(by operation of law) that all such private companies become full-fledged
public companies on 13.12.2000 until they amended their articles to include
the provisions of clause (d).

(iii) Section 43A (1C) was introduced to regulate the unhealthy practice of
accepting deposits from the public by private companies. The only legal
consequence of Section 43A(1C) was to treat such private companies to be
public companies but that did not stop them from being ‘private companies’
who accepted deposits from the public. Parliament wanted to remedy the
malpractice or ‘mischief’ of collecting deposits by private companies and
it did so by the addition of clause (d) to Section 3(1)(iii) on 13.12.2000
so as to mandatorily prohibit acceptance of deposits from the public. If
they did not incorporate the provisions of clause (d) in their articles and
stop accepting deposits from the public they were to become ‘public
companies’.

(iv) The appellant voted against the resolution to introduce (d) on 5th
May 2001 and issued his letter dated 6th June 2001. Therefore, estopped
from arguing that the first respondent is a private company.

(v) The fact that the first respondent is a public company and Article 57
is invalid has been conclusively held by the Bombay High Court vide an
earlier Order dated 14th November 2008 – which is a judgment in rem and has
attained finality.

(vi) The appellant applied for transfer of 5 shares – which resulted in
the total members exceeding 50. The fact that the total members have
exceeded 50 is admitted. Thus, the first respondent cannot claim to be a
private company.

(vii) After the Amendment Act of 2000, S. 43A stands abolished; Sub-section
2A is merely ministerial and a surplus; As first respondent is not a
private company after 13th December 2000,it cannot be a deemed public
company.

(viii) Article 57 offends the principle of free transferability under
S. 111A(2) which was recognized under S. 22A of the SCRA and is recognized
by this Hon’ble Court in the case of Vodafone International Holdings B.V.
v. Union of India, (2012) 6 SCC 613.
EXAMINATION OF THE CORRECTNESS OF THE CONCLUSIONS OF THE HIGH COURT:

(A)
51. When the High Court recorded that “there was nothing which permitted
such public company (companies covered under Section 43A, emphasis
supplied) to again become private company’, obviously, Section 43A, sub-
section (4) escaped the attention of the High Court. Sub-section (4) is on
the statute book since the inception of Section 43A. At the cost of
repetition, I reproduce it.
“(4) A private company which has become a public company by virtue of this
section shall continue to be a public company until it has, with the
approval of the Central Government and in accordance with the provisions of
this Act, again become a private company.”
52. Parliament always recognized the possibility of a private company
(which becomes a public company by virtue of operation of Section 43A) once
again reverting back to its status of a private company.

53. The reasons are obvious. Each one of the events stipulated under
Section 43A sub-sections (1), (1A), (1B) and (1C) which have the effect of
converting a public company into a private company is transient. For
example, if we take a case falling under sub-section (1) of Section 43A,
i.e. a private company becoming a public company by virtue of the fact that
25% of its shares are held by one or more bodies corporate; it is always
possible that at some point of time such bodies corporate decide to
disinvest either completely or partially (thereby reducing their holding to
less than 25%) their shares of such private company. In such a case, the
event or the condition which is essential to convert a private company into
a public company under Section 43A (1) ceases to exist. Similarly, take
the case falling under Section 43A(1B), i.e. a private company becoming a
public company by virtue of the fact that such a private company holds not
less than 25% of paid-up shares of a public company; If the private
company (becoming a public company, by virtue of operation of Section 43A
sub-section (1B), disinvest its shares either entirely or partially
(thereby reducing the holding to less than 25%) in the share capital of
that public company, once again the condition/event which converted the
private company into a public company ceases to exist. Such company can
always revert back to its original status of a private company. However,
sub-section (4) stipulates that such a reversion to the original status is
subject to the prior approval of the Central Government.

(B)
54. The High Court recorded a finding that after the amendment to the
Companies Act by Act 53 of 2000, only two classes of companies remained,
i.e. private and public companies and the third class of public companies
under Section 43A (HYBRID companies) ceased to exist. The correctness of
this conclusion is required to be examined.

55. Obviously, from 1960 to 2000, innumerable private companies would
have become public companies (HYBRID) by virtue of the operation of the
various sub-sections of Section 43A. If the Parliament really wanted to do
away with HYBRID companies, the best way would have been to repeal Section
43A. Because it is a settled principle of statutory interpretation that the
repeal of an enactment effaces the repealed statute from the statute book
ab initio thereby creating a fiction in law that such a statute never
existed, and never created in any legal consequences except for rights and
obligations which emanated from various acts and omissions covered by the
statute and are saved by the express provisions under the repealed act or
by virtue of the provisions of the General Clauses Act. Therefore, by
repealing Section 43A, Parliament could have put an end to the existence of
all HYBRID companies. We are aware that there can be other technics by
which the same result can be achieved. Therefore, it is required to be
examined whether the Act 53 of 2000 refers to achieve the same result. It
does not repeal Section 43A. Sub-section (11) which came to be inserted by
the said amendment in Section 43A only declares:-
“(11). Nothing contained in this section, except sub-section (2A),
shall apply on and after the commencement of the Companies (Amendment) Act,
2000.”
56. What exactly is the meaning of sub-section (11) is to be examined?

57. There must be innumerable private companies in this country. For the
purpose of our analysis, they can be classified into two categories, (i)
private companies which came into existence prior to the Amendment Act 53
of 2000 (w.e.f. 31.12.2000); and (ii) private companies which came into
existence after the abovementioned date.

58. Insofar as the first of the abovementioned two categories is
concerned they can further be categorized into (i) private companies which
remained as such, and (ii) private companies which became public companies
by virtue of operation of Section 43A.

59. Insofar as private companies which came into existence prior to
13.12.2000 and remained as such without falling into the net of Section 43A
and private companies which came into existence after 13.12.2000, sub-
section (11) of Section 43A would have no application.

60. The legal consequences emanating from insertion of sub-section (11)
in Section 43A only visit the second category mentioned above i.e. private
companies which came into existence prior to 13.12.2000 but became public
companies by virtue of operation of Section 43A.

61. Of them, we are only concerned with those private companies which
became public companies by virtue of operation of Section 43A(1C), that is,
those private companies which had accepted deposits from PUBLIC. Mere
acceptance of the deposits from PUBLIC prior to 13.12.2000 did not
contravene any law. Such acceptance was only regulated by virtue of
Section 58A. Though such private companies were treated as public
companies by virtue of Section 43A(1C) they were entitled to continue those
stipulations dealing with the matters specified under Section
3(1)(iii)(a)(b)&(c). It is only w.e.f. 13.12.2000, Section 3(1)(iii) of
the Act came to be amended by inserting sub-clause (d) which obligates a
private company to contain a prohibition against any invitation or
acceptance of deposits from PUBLIC in such company’s Articles of
Association.

62. What happens to those private companies (obviously there must be
innumerable) which existed prior to 13.12.2000 and had also invited and
collected deposits from PUBLIC as they were legitimately entitled to do so
prior to the amendment? If the conclusion of the High Court that the
concept of DEEMED public company is abolished is correct, all those private
companies should become public companies (not HYBRID/DEEMED public
companies) overnight until their Articles of Association are amended. As a
consequence thereof, their respective shareholders lose a vested right
flowing out of the Articles of Association (created by a contract) which
they collectively enjoyed till 13.12.2000 to restrict the right of
individual shareholders to freely transfer their shares. Such a collective
right by definition inheres in the shareholders of a private company and
protected by virtue of proviso to Section 43A(1C) notwithstanding the fact
that such companies were treated as public companies prior to 13.12.2000.
To deprive the shareholders of HYBRID companies such a collective right
would be too drastic a change overnight without giving any option or time
to the HYBRID company and its members to retain the basic character of the
company as a private company.

63. Though, in theory, it is open to the legislature to create such a
situation, whether the Parliament intended such a drastic course of action
is the question. It must be remembered that in the ultimate analysis a
company is a voluntary association of its members who have a fundamental
right to form associations under Article 19(1)(c) of the Constitution of
India, the inference which is obvious from the text of the Constitution and
also on cumulative reading of the decisions of this Court in Damyanti
Naranga v. The Union of India & Others, (1971) 1 SCC 678, Rustom Cavasjee
Cooper v. Union of India, (1970) 1 SCC 248, Bennett Coleman & Co. & Others
v. Union of India & Others, (1972) 2 SCC 788. The fundamental right to form
an association implies the right to form the association on such terms and
conditions agreed upon by its members, so long as such terms and conditions
are not in conflict with any law or public policy. No doubt, the State
can, by law, impose restrictions on such rights on the basis of the
considerations mentioned in Article 19(4), but such restrictions must be
reasonable.

64. The destruction of the collective rights of the members of the
companies mentioned in para 62, in our view, would require, at the least,
an express provision of law and such a provision must be a ‘reasonable
restriction’ within the meaning of that expression occurring in Article
19(4). In the absence of any express provision which takes away the
fundamental right of the shareholders of a private company, we are inclined
to read a restriction on the collective right of the shareholders of a
private company to restrict the right of the individual shareholders to
freely transfer their shares.

65. Our view is supported by the parliamentary practice and history of
the amendments made to the Companies Act itself.

66. Under the Act 53 of 2000 when the definition of private company is
amended by inserting a clause by which requirement of having a “minimum
paid up share capital of one lakh rupees or such higher paid up capital as
may be prescribed by its articles” is introduced for the first time,
Parliament also gave a window of 2 years for the private companies existing
on the date of the commencement of the Amendment Act i.e. 13.12.2000. By
Section 3(5)[12] it is declared that companies failing to comply with the
newly introduced obligation “shall be deemed to be defunct” companies and
their names “shall be struck off from the register”. Parliament not only
gave a window period to the existing companies to take steps to comply with
the amended law but also provided expressly for the consequences to follow
on the failure to comply with the law.

67. One more reason for our inability to accept the theory of abolition
of HYBRID companies is that – if accepted, the Amendment Act 53 of 2000
would have the effect of retrospectively taking away the rights
collectively enjoyed by the shareholders (of private companies which became
HYBRID companies) from 1956 onwards. In this context, it is worth
remembering the words of this Court in K.C. Arora & Another v. State of
Haryana & Others, (1984) 3 SCC 281 at 294:
“The legislation is pure and simple, self-deceptive, if we may use such an
expression with reference to a legislature-made law. The legislature is
undoubtedly competent to legislate with retrospective effect to take away
or impair any vested right acquired under existing laws but since the laws
are made under a written Constitution, and have to conform to the dos and
don’ts of the Constitution, neither prospective nor retrospective laws can
be made so as to contravene fundamental rights. The law must satisfy the
requirements of the Constitution today taking into account the accrued or
acquired rights of the parties today. The law cannot say, 20 years ago the
parties had no rights, therefore, the requirements of the Constitution will
be satisfied if the law is dated back by 20 years. We are concerned with
today’s rights and not yesterday’s. A legislature cannot legislate today
with reference to a situation that obtained 20 years ago and ignore the
march of events and the constitutional rights accrued in the course of the
20 years. That would be most arbitrary, unreasonable and a negation of
history. … Today’s equals cannot be made unequal by saying that they were
unequal 20 years ago and we will restore that position by making a law
today and making it retrospective. Constitutional rights, constitutional
obligations and constitutional consequences cannot be tampered with that
way. A law which if made today would be plainly invalid as offending
constitutional provisions in the context of the existing situation cannot
become valid by being made retrospective. Past virtue (constitutional)
cannot be made to wipe out present vice (constitutional) by making
retrospective laws.”
68. Apart from that, it is rightly pointed out by the appellant – if
Parliament really wanted to put an end to the existence of all the HYBRID
Companies, Parliament should have deleted all reference to the HYBRID
(Section 43A) companies in the Act. But Section 111(14) still continues to
make reference to Section 43A.

69. Therefore, we are of the opinion that the concept of HYBRID (Section
43A) companies is not altogether abolished. At least insofar as the
Companies falling under Section 43A(1C) are concerned which were in
existence on 13.12.2000 would continue as HYBRID Companies.

(C)
70. The other conclusion of the High Court that the failure of the first
respondent company to amend its Articles of Association to give effect to
clause (d) of Section 3(1)(iii) rendered the first respondent company to
cease to be a private company, in our opinion, is irrelevant for the
decision on the REAL question in this case.

71. The REAL question is not whether the failure to amend the Articles of
Association by the first respondent company rendered the first respondent
company (which is otherwise a private company) a public company, but
whether such a failure destroyed the collective right of the members of the
first respondent company to have shares whose transferability is subject to
limitations and restrictions contained in Article 57 of its Articles of
Association.

72. Originally, Section 3(1)(iii) stipulated – to be a private company a
company’s Articles of Association are required to contain certain
stipulations with regard to the matters specified in clause (a), (b) and
(c). By virtue of the Act 53 of 2000 w.e.f. 13.12.2000 a private company’s
Articles of Association are required to contain additional stipulations
relating to the matter contained in clause (d) also. The question is
whether the newly introduced requirement is applicable to existing private
companies also or only to those which come into existence subsequent to the
commencement of the Act 53 of 2000?

73. Section 27(3) mandates that the articles of a private company having
share capital (such as the one on hand) shall only contain provisions
relating to matters specified in clauses (a), (b) and (c) of Section
3(1)(iii) but not matters relating to clause (d). In other words, though
the Parliament chose to introduce clause (d) in Section 3(1)(iii) (by an
amendment in the year 2000), did not think it necessary to make a
corresponding amendment to Section 27(3). Whether such an omission is
accidental or by a design is required to be examined? If it is by a design
what is the purpose sought to be achieved of such a design requires an
examination?

74. The Companies Act never prohibited the acceptance of deposits. Prior
to the Amendment Act of 2000, there has never been a provision in the
Companies Act which altogether prohibited companies either public or
private from inviting or accepting deposits. Section 58A(1)[13] of the
Act, (which was introduced by Act 41 of 1974) for the first time made a
provision enabling the Central Government to prescribe “the limits up to
which, the manner in which and the conditions subject to which deposits may
be invited or accepted by a company either from the public or from its
members”. The remaining sub-sections of Section 58A make various
stipulations regarding the method and manner of inviting and accepting
(after the insertion of the Section) deposits or the renewal of deposits
taken prior to introduction of the Section and the penalties for the
failure to comply with the stipulations contained in the said Section – the
details of which are not necessary for the present purpose. But even
Section 58A did not prohibit the acceptance of deposits. Irrespective of
the fact whether a company accepting deposits is a private company or a
public company, the invitation or acceptance of such deposits is only made
to strict regime of regulations under Section 58A.

75. Then came, in 1988, Section 43A(1C), which only declared that a
private company either accepting deposits from or renewing existing
deposits (made either after or prior to 15.6.1988 respectively) collected
from “persons other than its members, directors or their relatives”
(hereinafter for the sake of convenience referred to as “PUBLIC”) shall
become a public company. But under the proviso to sub-section (1C), even
after becoming a public company, such a Company can retain either
restrictions or limitations contemplated under Section 3(1)(iii).

76. Therefore, the question is-what is the effect of the insertion of
clause (d) in Section 3(1)(iii)?

Prior to 1988:
77. Whether a Company should accept deposits from PUBLIC or not is a
policy choice only of the company and its members. Even prior to the
introduction of Section 3(1)(iii)(d) & Section 43A (1C), the members of a
private company could have either permitted or prohibited the company from
accepting deposits from PUBLIC or stipulated conditions subject to which
deposits could be taken. If a company’s internal policy prohibited the
acceptance of deposits from PUBLIC and contrary to such internal policy
deposits are collected from PUBLIC it was always open to the members of the
company to deal with the situation and the persons violating the company’s
policy.
78. In 1988, the Parliament thought it necessary to provide for a more
rigorous control and scrutiny of the activities of accepting deposits from
PUBLIC by private companies and introduced sub-section (1C) of Section 43A,
thereby enabling the State to have a greater control over such activity of
such private companies by treating them as public companies. The
regulations, control and supervision to which the management of public
companies is subjected to under the Act is higher in degree compared to the
regulations, control and supervision to which the management of a private
companies is subjected to under the Act. The control contemplated under
Section 43A(1C) is in addition to the regulations and supervision brought
in by virtue of Section 58A.
Before the amendment Act 53 of 2000:
79. If a private company chose to incorporate a stipulation not to accept
deposits from PUBLIC, it is a matter of its internal policy. But if it
incorporated such a stipulation and defaulted in compliance with such
stipulation, the Company only ceased “to be entitled to the privileges and
exemptions conferred on a private company by or under the Act” and the “Act
shall apply to the company as if it were not a private company” – by virtue
of the operation of Section 43[14] which only creates a legal fiction.
Section 43 does not declare that such companies do become public companies
unlike Section 43A. On the other hand, the proviso to Section 43 enables
the Central Government to condone the lapse of such private companies.
“Proviso to Section 43:

Provided that the Central Government on being satisfied that the failure to
comply with the conditions was accidental or due to inadvertence or to some
other sufficient cause, or that on other grounds it is just and equitable
to grant relief, may, on the application of the company or any other person
interested and on such terms and conditions as seem to the Central
Government just and expedient, order that the company be relieved from such
consequences as aforesaid.”
80. Notwithstanding the fact that the Parliament thought it necessary for
the State to impose a higher degree of control over the affairs of the
management of such private companies inviting and accepting deposits from
PUBLIC, Parliament did not think it necessary to restrict the collective
right of the members of a private company to impose restrictions on the
right of individual shareholders to freely transfer their respective
shares. Therefore, the proviso to sub-section (1C) of Section 43A. For
that matter, in none of the four contingencies contemplated under Section
43A(1), (1A), (1B) and (1C), Parliament thought it necessary to restrict
such collective right of the shareholders of a private company. Such
private companies are to be treated as public companies for certain
purposes.

81. If a private company chooses not to incorporate the prohibition, such
as the one contemplated under Section 3(1)(iii)(d), and accepts deposits
from the public then such collection of deposits is regulated by Section
58A. If it chooses to incorporate a stipulation but fails to comply with
the same, it would attract the consequences mentioned in Section 43 which
consequences are also avoidable under the proviso to Section 43.

82. It must be remembered that the kind of control which the Parliament
sought to impose on private companies which earlier attracted sub-sections
(1) to (1B) of Section 43A is now thought clearly not necessary by the
Parliament. An inference obvious from Section 43A(11) whatever be the
other implications of those sub-sections.

83. Even during the period when Section 43A operated, the Parliament
never thought of curtailing the collective right of the members of the
private companies to have restriction on the rights of individual
shareholder to freely transfer shares. Therefore, to believe that such
restriction is now sought to be imposed only in the case of those private
companies in existence on 13.12.2000, which had earlier attracted Section
43A(1C), but not in the case of private companies, which earlier attracted
sub-sections (1), (1A) and (1B), would be illogical.

84. The insertion of clause (d) in Section 3(1)(iii) is admittedly only
prospective. Therefore, on and after 13.12.2000, if any body proposes to
create a private company, the Articles of Association of such company must
contain a clause prohibiting the invitation and acceptance of deposits from
PUBLIC.

85. For all the abovementioned reasons, we are unable to agree with the
submission of the respondents that by the Amendment Act 53 of 2000 and more
particularly sub-section (11) of Section 43A, the Parliament intended to
curtail or destroy the collective right of the shareholders of a HYBRID
company to impose restrictions on the rights of the individual shareholders
to have unfettered right of transfer of their shares. Such a restriction
which, in our view, constitutes a restriction on the fundamental rights
under Article 19(1)(c), requires a more express legal authority and cannot
be brought in by inference.

86. The effect of the amendment to Section 3(1)(iii) is: insofar as the
private companies in existence on 13.12.2000, if they choose to make
provisions in their Articles of Association to give effect to the mandate
of Section 3(1)(iii)(d), they become private companies w.e.f. such date
they make such provision by virtue of Section 43(2A) of the Act. If they
do not make such an amendment, they would still continue to be public
companies governed by Section 43A(1C) [HYBRID Companies] and can continue
to have provisions in their Articles of Association referable to Section
3(1)(iii)(a), (b) & (c).

87. Here, an argument of the respondent that such an interpretation of
sub-section (11) creates “two classes of private companies and would have
discriminatory results” is required to be answered. In our view, the
argument is based on a wrong premise. It proceeds on the basis that HYBRID
companies created prior to 13.12.2000 are private companies. We have
already held that HYBRID companies are public companies which in law are
entitled to retain some features of the private companies if the
shareholders choose to retain them. Therefore, the question of
discrimination does not arise.

88. Therefore, in our opinion, the failure of the first respondent
company to amend its Articles of Association to give effect to clause (d)
of Section 3(1)(iii) does not effect the operation of its Article 57.

89. That leaves us with two more questions raised by the respondents
herein. They are contained in submissions (iv), (v) and (vi) noted earlier
in the judgment. In fact, submissions (iv) and (v) are interconnected.
The substance is that in view of the fact that the appellants herein
opposed the resolution to amend the articles of association of the first
respondent company to bring them in tune with the newly inserted clause (d)
of Section 3(1)(iii), they are estopped from arguing that the first
respondent company is not a public company and secondly in view of the
judgment of the Bombay High Court dated 14.11.2008 in Company Petition
No.77 of 1990 “to which the appellants herein were originally the parties
but withdrew from the said company petition later” where the Bombay High
Court held as follows:
“Insofar as the present Petitioners are concerned as a matter of fact they
are free to deal with the shares held by them. In that, the shares are now
freely transferable. Indeed, when the Petition was presented at the
relevant time, the Respondent No.1 Company was a Private Limited Company.
As a result, there was restriction in the transfer of shares. However, it
is common ground that now the Respondent No.1 Company has become a Public
Limited Company as a result of Special Resolution moved in the Extra
Ordinary General Meeting dated 5th May 2001 having been defeated. Having
acquired the status of a Public Limited Company, the restriction on the
right to transfer the shares which was applicable to Private Limited
Company, would naturally get diluted.

The appellants are precluded to argue that the first respondent Company is
not a public company.

90. Both the submissions are required to be rejected. The submission
based on the principle of estoppel is required to be rejected in view of my
conclusion that the HYBRID companies contemplated under Section 43A(1C),
which were in existence on 13.12.2000 would continue to be in existence.

91. It is already concluded earlier in this judgment that the requirement
of amending the Articles of Association pursuant to the Amendment Act 53 of
2000, insofar as such companies are concerned, is only optional on the part
of the shareholders. The fact that the shareholders of a HYBRID company
exercised option not to amend the Articles of Association thereby
converting a HYBRID company into a private company does not prevent such
shareholders from advancing an argument that the first respondent company
is not a public company but still a HBRID company.

92. The second submission is that the judgment in Company Petition No.77
of 1990 is binding upon the appellants on the ground that they were parties
to the said company petition earlier and withdrew from the same
unconditionally and, therefore, they are precluded from arguing anything
contrary to the conclusion recorded therein.

93. The principles of law which preclude a party to a civil litigation
from agitating certain issues are contained in Section 11 and Order II Rule
2 of the Code of Civil Procedure, 1908. Section 11 deals with the
principle of res judicata and it prohibits a Court from trying any suit or
issue in which the matter directly and substantially in issue in a former
suit has been heard and finally decided.

94. The question whether the first respondent Company is a public company
or a HYBRID company or a private company was never directly and
substantially in issue in Company Petition No.77 of 1990. The parties to
the said company petition proceeded on the basis that in view of the fact
that an amendment to the Articles of Association to give effect to the
newly inserted clause (d) of Section 3(1)(iii) could not be carried on, the
first respondent company became a public company. Therefore, the Court
never examined that question of law. Hence, it cannot be said that the
appellants are precluded from raising such a question of law in the instant
appeal.

95. We therefore, do not propose to examine the question as to what is
the effect of the appellant’s withdrawal from the abovementioned company
petition.

96. The only other submission of the respondent which requires to be
dealt with is regarding the transfer of five shares of the appellant which,
according to the respondents, resulted in the membership of the first
respondent company exceeding fifty thereby rendering the first respondent a
public company. Unfortunately, though the High Court noted the submission
at para 9, it did not record any finding in this regard. We, therefore,
decline to examine this question. This Court cannot be converted into a
Court which enquires into the questions of fact for the first time.

97. In view of the fact the High Court, though noted the contentions of
the respondent herein, failed to record any conclusion thereon, we deem it
appropriate to remit the matter to the High Court only for the purpose of
considering the abovementioned submissions of the respondent and take
appropriate decision. We order accordingly.

98. This appeal stands allowed.

………………………….J.
(J. Chelameswar)
………………………….J.
(A.K. Sikri)

New Delhi;
October 28, 2014
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 2481 OF 2014
Darius Rutton Kavasmaneck …Appellant

Versus

Gharda Chemicals Limited & Others …Respondents
O R D E R

In view of the order remitting the matter to the High Court, we deem
it appropriate that the interim order passed earlier on 22.7.2011 by this
Court will continue till the disposal of the matter by the High Court.
The High Court is requested to dispose of the matter expeditiously in
view of the long pendency of the matter.
………………………………J.
(J. CHELAMESWAR)

………………………………J.
(A.K. SIKRI)
NEW DELHI
OCTOBER 28, 2014.

———————–
[1] 57. Save as aforesaid the following provisions shall apply to the
transfer of shares –

A member of the company may transfer a share to his lineal
descendent, but save as aforesaid no share shall be transferred to a person
who is not a member of the company so long as any member is willing to
purchase the same at the fair value as hereinafter provided.

The member proposing to transfer any shares (hereinafter called the
proposing transferor) shall give notice in writing (hereinafter called a
transfer notice) to the Company that he desires to transfer the same;

Within the period of seven days from the receipt of a transfer notice
as aforesaid the Company shall offer to each of the existing members of the
company respectively such number of the shares included in the transfer
notice as a pro rata or as nearly as may be to the holding of each member
respectively on the footing that if he desires to purchase any or all of
such members of the said shares at the fair value he shall within fifteen
days of the offer be entitled to apply for the purchase and transfer of the
same and the company shall be bound, upon payment to the transferor of the
fair value of such shares, to transfer the shares of member applying;

In case any member or members shall not have applied for the purchase
and transfer of any or all of the shares to which he is entitled, the
company shall within seven days of the date at which the offer closed,
offer the untaken shares to such of the members as have applied for the
purchase and transfer of all the shares to which they were entitled by the
terms of the original offer in proportion as the holding of each of such
members bears to the total number of shares held by them and they shall be
entitled within fifteen days of the offer to apply for the purchase and
transfer of a pro rata number of the said untaken shares and the company
shall be bound, upon payment to the transfer of the fair value of such
shares, to transfer the shares to the member applying;

The promising transferor shall be bound to execute a transfer in
respect of any shares so sold and in default thereof be deemed to have
executed such a transfer. The company shall thereupon cause the names of
the members who have purchased the shares to be entered in the Register as
the holders of such shares and thereafter the validity of the proceedings
shall not be questioned by any person;

In case no member shall apply for any of the shares included in the
transfer notice or in case any are untaken after the compliance with the
foregoing provisions of this Article the intending transferor shall have
the right (which right shall endure for the period of one year from the
date of transfer notice) to sell and dispose of hi shares to any person and
at any price and to apply for registration of the transfer of the same and
the company shall be bound to give effect to the transfer of such shares
accordingly.

For the purpose of this clause the fair value of the share shall be
such sum, if any, as the auditors for the time being of the Company shall
certify as the fair value thereof provided that it expressly declared that
the fair value shall be (1) the amount of capital paid upon thereon plus
(2) a sum bearing the same proportion to the value as appearing in the
company’s last balance sheet of any reserve fund or other fund of the
company as the capital paid up on all the shares of the company for the
time being issued plus or minus as the case may be, (3) a sum bearing the
same proportion to the value as appearing in the profit and loss account
consisting of or representing undivided profits or losses as the capital
paid up on such share bears to the total capital paid up on all the shares
of the company for the time being issued.”
[2] 3.(1)(iii) – ‘private company’ means a company which has a minimum
paid-up capital of one lakh rupees or such higher paid-up capital as may be
prescribed, and by its articles,– …………
(d) prohibits any invitation or acceptance of deposits from
persons other than its members, directors or their relatives.
[3] That this Hon’ble Bench be pleased to grant a permanent order and
injunction restraining the 2nd/3rd respondents by themselves or through
their servants and or agents, directly or indirectly, from selling,
transferring, alienating, dealing or disposing the shares held, directly or
indirectly, by the 2nd/3rd Respondents in the 1st Respondent to any person
without first offering the same to the Petitioners at the fair value
quantified in accordance with Article 57(g) of the Articles of Association
of the 1st Respondent.
[4] 3.(1)(iii) – ‘private company’ means a company which, by its
articles, –
(a) restricts the right to transfer its shares, if any;
(b) limits the number of its members to fifty not including –
xxx xxx xxx xxx

[5] 3. Definition of ‘company’, ‘existing company’, ‘private company’
and ‘public company’ – (1) In this Act, unless the context otherwise
requires, the expressions ‘company’, ‘existing company’, ‘private company’
and ‘public company’ shall, subject to the provisions of sub-section (2),
have the meanings specified below –
(i) ‘company’ means a company formed and registered under this Act
or an existing company as defined in clause (ii);
[6] Section 12 of the Companies Act recognizes the possibility of the
formation of two clauses of Companies, companies “limited by shares” and
companies “ limited by guarantee”.
[7] “Explanation – For the purposes of this sub-section, “bodies
corporate” means public companies, or private companies which had become
public companies by virtue of this section.”
but such an explanation was not there originally, but added by
Act 31 of 1988.

[8] 43. Consequences of default in complying with conditions
constituting a company a private company – Where the articles of a
company include the provisions which, under clause (iii) of sub-section (1)
of section 3, are required to be included in the articles of a company in
order to constitute it a private company, but default is made in complying
with any of those provisions, the company shall cease to be entitled to the
privileges and exemptions conferred on private companies by or under this
Act, and this Act shall apply to the company as if it were not a private
company :

Provided that the Central Government, on being satisfied that the
failure to comply with the conditions was accidental or due to inadvertence
or to some other sufficient cause, or that on other grounds it is just and
equitable to grant relief, may, on the application of the company or any
other person interested and on such terms and conditions as seem to the
Central Government just and expedient, order that the company be relieved
from such consequences as aforesaid.

[9] 117. Therefore, in my view, once the first respondent is a public
company as evidenced by the certificate referred to above, with effect from
17th August 1988, then, the amendment made in 2000 would be applicable and
section 43A ceases to apply to it. That the words “On and After”, are used
makes no difference as far as present case4 is concerned. In the present
case, the status of the first respondent as a public company remains and it
is now academic to find out whether it was a deemed public company earlier
as contended. Once the law makes only a broad categorization as noticed
above, then, it is not necessary to deal with this contention any more.
[10] Section 36. Effect of memorandum and articles.—(1) Subject to the
provisions of this Act, the memorandum and articles shall, when registered,
bind the company and the members thereof to the same extent as if they
respectively had been signed by the company and by each member, and
contained covenants on its and his part to observe all the provisions of
the memorandum and of the articles.

(2) All money payable by any member to the company under the
memorandum or articles shall be a debt due from him to the company.
[11] “(3) Every private company, existing on the commencement of the
Companies (Amendment) Act, 2000, with a paid-up capital of less than one
lakh rupees, shall within a period of two years from such commencement,
enhance its paid-up capital to one lakh rupees.

(5) Where a private company … fails to enhance its paid up capital
in the manner specified in sub-section (3) ….., such company shall be
deemed to be a defunct company within the meaning of section 560 and its
name shall be struck off from the register by the Registrar.”

[12] Section 3(5) – Where a private company or a public company fails to
enhance its paid-up capital in the manner specified in sub-section (3) or
sub-section (4), such company shall be deemed to be a defunct company
within the meaning of section 560 and its name shall be struck off from the
register by the Registrar.
[13] Section 58A. Deposits not to be invited without issuing an
advertisement.—(1) The Central Government may, in consultation with the
Reserve Bank of India, prescribe the limits up to which, the manner in
which and the conditions subject to which deposits may be invited or
accepted by a company either from the public or from its members.
[14] Section 43. Consequences of default in complying with conditions
constituting a company a private company.—Where the articles of a company
include the provisions which, under clause (iii) of sub-section (1) of
section 3, are required to be included in the articles of a company in
order to constitute if a private company, but default is made in complying
with any of those provisions, the company shall cease to be entitled to the
privileges and exemptions conferred on private companies by or under this
Act, and this Act shall apply to the company as if it were not a private
company.

———————–
62

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